The Dragon Is Struggling With A Cash Crunch – Analysis

China is facing severe economic constraints. The pandemic and its global isolation have added to its financial problems. From low tax revenue to the recent trade war with the United States have all factored into halting the Chinese dream of economic expansion. The country has taken a blow on its economy to counter the virus but with the cost of paused progress.

China is battling to balance its economy amidst the pandemic. A cash crunch is obvious and bound to obstruct it from reaching its ambitious goals. China had made great leaps in giving out loans and invested in mega projects but today it is witnessing a major setback as the world grapples with the pandemic.

In 2018, China experienced a low fiscal revenue rate of 6.2%, only to confront worse in 2019 as the rate slowed to 3.8%. China had targeted for 5% in the last year but this was missed by 1.2%. This shortcoming is going to impede its capacity to spend in the future as revenue collected is a meagre 19 billion yuan. Liu Jinyun, a Finance Ministry official, stated: “Affected by the development of epidemic at home and abroad, fiscal revenues are still declining in the second quarter, but the pace of fiscal revenue decline will gradually moderate.” This year, the country encountered a 14.3% fall in its fiscal revenue in the first quarter.

According to an IMF report, China’s budget deficit is on the rise. The IMF also warned that its public debt and total debt-to-GDP ratio will grow on till 2024. Vítor Gaspar, Director of IMF’s Fiscal Affairs Department, on July 10, cautioned the world on global public debt. He mentioned the debt will exceed 100% of the GDP in 2020-21. When he was asked about the specific case of China, he said, “As in many other countries, China’s government debt has risen during the crisis and policymakers will have to adjust fiscal policy over the medium term once the crisis is behind us.”

The trade war with the United States shook the Chinese economy and tested its limit. U.S. tariffs caused a 25% export loss to the country last year. China sustained a $35 billion export deficit for tariffed goods in the first half of 2019. Consequently, a number of U.S. importers shifted their supply chains by abandoning China and foraging ties in other Asian countries in a move to avoid the hefty tariffs.

COVID-19 too has inflicted a loss to the economy, its GDP is projected to fall as low as 1.8% in 2020. The demand for Chinese products worldwide is contracting and so are the numbers of foreign companies in the country. China decided to endure economic damage and proceeded with a lockdown in the initial days as the virus spread globally.

Overall, China is in a perilous situation where it is stuck with low economic growth and worldwide backlash. The claim of China’s hand in engineering the virus has worsened its image globally that can damage its trade ties with other countries in the future. Already many countries have pulled out their companies from the country and have been given space to prosper in other Asian countries. China is getting banned in numerous small ways – from high tariffs imposition to their apps getting banned.

China’s Belt and Road Initiative’s (BRI) pace and scope will be hampered by the current economic downturn. China alone cannot afford this demanding undertaking and thus require more private and collaborative involvements.

Currently, 138 countries are involved in the BRI covering 60% of the world’s population. It is spread in Europe, South America, Asia, and Africa and is the contributor of one-third of the global economic output. According to the World Bank, one-third of the BRI-recipient low-income developing countries (LIDCs) have a high risk of debt distress. The report also claimed that two-third of the BRI-recipient emerging market economies (EMEs) will have to bear elevated debt vulnerabilities with debt crossing the indicative threshold of 50% of GDP or gross financing needs over 15% of GDP.

Since most of the recipient countries are not in good economic condition of paying back the loan furnished by the BRI, there are high chances of them becoming either non-performing in nature or China might procure collaterals. In either case, the money transfer won’t take place for a considerable period of time leaving Chinese exchanges in deficit in the short run. The pandemic that has left some countries worst-off are demanding China to either delay their repayments or grant loan write-offs. Taking this scenario into reflection, the Belt and Road Initiative is gradually becoming a contributor to China’s economic crisis.

In 2017, Cary Huang regarding the BRI’s financing, said: “The initiative is expected to require at least $5 trillion in the next five years alone. In Asia, the initiative will need $2.5 trillion alone over the next decade.” Due to the decelerating Chinese economy, it can be gauged that the BRI won’t advance at the same speed in the future. The Chinese financial upheaval is thus negatively impacting this the BRI.

The above discussion implicates that the BRI has played a role in the economic crisis of the Mainland and is going to suffer its repercussions in the near future. The BRI has infiltrated many developing and underdeveloped economies making them dependent and susceptible to a higher risk of economic breakdown.

China’s cash crunch can worsen the global economic crisis, the poorest of the countries will undergo the most damage. Job loss and food crisis will be rampant as the result – destabilizing developing and underdeveloped countries. The ripples of this will also be felt in the deteriorating Human Development Index (HDI) of the emerging economies.

*Sirat Bhalla is a Research Student at Janki Devi Memorial College, Delhi, India. The views expressed in this essay are the author’s own.